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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: mishedlo who wrote (20139)10/21/2004 11:31:19 PM
From: glenn_a  Read Replies (3) of 110194
 
Mish.

You commented:

Am I the only one that thinks that comparisons between the Weimar Republic and current US$ printing are preposterous?

I certainly agree that there are substantive differences between Germany of the 1920s and the U.S. today.

It's not so much whether 1920's Germany is an "exact" or "preposterous" comparison to me, but rather if it has useful lessons.

The U.S. credit system has extended credit at a truly phenomenal rate over the past decade. "If" the U.S. were to socialize all outstanding losses in the financial system, I believe you'd effectively have a situation similar to the German financial system in the early 1920's (BTW, monetary mechanics are not particularly my strong point, so please jump in to correct me if I am making any incorrect assumptions or conclusions).

Now if the U.S. doesn't socialize ALL outstanding losses in the financial system, what if they just socialize those of say the top banks and GSE's? What effect would that have on money in circulation? If I'm thinking straight here, rather than a whole lot of folks holding worthless paper, there debt instruments would not be convertible into cash (and therefore future claims on American product capacity).

Will America make good on all its outstanding debt obligations at the existing trade-weighted value of its currency? I don't know. I wouldn't confidently be able to say yes or no at this point. However, I do know that the U.S. today is not the U.S. of the 1930s or Japan of the 1990s either. The U.S. today is the world's largest debtor nation, and much of that debt is held by foreigners, and that's a HUGE claim on the future productive capacity of the nation. The temptation, and even the necessity of devaluing the value of the currency (i.e. inflation) will be very significant.

Other than that, as I mentioned before, I agree that current storm clouds look very deflationary. Just not sure what the policy response will be if things get really ugly.

Regards,
Glenn
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